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Chapter 5 : Audit Techniques and Internal Audit

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1 Chapter 5 : Audit Techniques and Internal Audit
T.Y.B com (Honours) Academic Year : Trimester : VIII

2 Meaning of Test Checking
AAS 5 issued by The Institute of Chartered Accountant of India states that in forming an opinion an auditor may obtain audit evidence on a selective basis. The selection may be based on the auditor’s personal judgement or statistical sampling technique. …

3 When is test checking not suitable?
Opening and closing Entries Bank Reconciliation Statements Items requiring calculations (eg. Dep, royalty) Very Important transactions/balances Transactions on which the auditor has to give specific reporting Exceptional/ non recurring transactions

4 How to select a Sample 100% Coverage in 3-5 Years Surprise
Factors to decide the Extent of checking : - possibility of errors, frauds, misstatements - nature of materiality of item - nature of business and size of company - System of accounting - internal controls - internal audit working - past experience - results of checking done till date - type of information available - past trends and ratio analysis

5 Drawbacks of Sampling Arbitrary Selection
Ignores Statistical Techniques Ignores quality Sampling risks

6 Precautions to be taken prior to test checking
Classify Transactions Systems and Procedures Internal Controls Test Check Plan No Bias in Selection Avoid Unsuitable Areas Decide No. of Transactions Decide Significance of Errors

7 Methods of selecting Sample and their evaluation
There are mainly 3 methods of sampling : Random Selection Systematic Selection Haphazard Selection There are mainly 3 methods of evaluation of samples : Analysis of errors in the sample Projection of Errors Reassessing Sampling risk

8 Auditors duties on internal control
Responsibility of Management Auditor’s Duty Need for Evaluation -to establish reliability of internal control -Decide the areas of checking Steps in Evaluation -Understand the system - Test applications -Evaluate the System Communicate Weakness to Management Reporting of internal control under CARO

9 Inherent Limitations of Internal Control
The objectives of internal control may not be achieved due to the following limitations : Costs more than benefits Human Error Collusion of duties of employees Misuse of authority by employee Manipulation by Management

10 Internal Control for Sales
Division of work Procedure of transaction Cross-check within depts Change in Duties Annual Leave Limited Access to books Proper Recording Prompt Recording Accounting Policies Safeguarding stock in hand Errors and Frauds Reconciliation and Confirmations

11 Internal Control for Debtors
Credit Limits Prompt recording Prompt Adjustment Age wise schedule Statement of Accounts Discounts and write offs Reconcile control accounts

12 Internal control for Purchases
Division of Work Procedures Cross checking Change in duties Annual Leave Access to books Proper recording Prompt recording Accounting policies Safeguarding Errors and Frauds Reconciliation and confirmation

13 Internal control for Creditors
Prompt Recording Prompt adjustment Age wise schedule Statements of accounts Discount and write backs Reconcile Control accounts

14 Internal control for salaries and wages
Division of Work Procedure for Payment Cross check Change in duties Annual leave Access to books Proper Recording Prompt Recording Accounting Policies Safeguarding Errors and Frauds

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